27 Jun Business Brokers Must Adapt to Survive the Nation’s Long-Term Small Business Credit Crisis
I think you will profit by reading the article below written by Rich Kolman, President & Principal Owner of Franchise Note Buyers, LLC. Rich and his team are reaching out to business brokers nationwide, offering to cash out both (1) seller-financed notes which were carried back by sellers on previously completed deals; and (2) not-yet-created seller-financed notes for pending deals, via their Transfer Facilitator™ program. Despite the name of their company, they work with independent businesses just as they work with notes created by the sale of franchised businesses.
Immediately after Rich Kolman’s article, I’ve added a summary of how their Franchise Note Buyers’ process operates for business brokers, particularly for not-yet-created carry-back notes used to finance deals.
Tom West
“For mankind and animals alike, it is not the strongest who survive, nor the most intelligent, but the one who best adapts to change.” – Charles Darwin
I was honored to be one of the 200 or so people invited by the International Franchise Association (IFA) to attend their April 7, 2011 Small Business Finance Summit. This event was co-produced by Consumer Bankers Association, the National Association of Government Guaranteed Lenders, and the National Restaurant association. The purpose of this Summit – and its follow-up working group – was to start collaboration between government, bank lenders, and small business advocacy groups, searching for new and better ways to improve credit access and thereby spur business growth nationwide.
By no means was this event limited to focusing on the multi-billion dollar franchising industry, where I have served as an in house attorney (e.g., McDonald’s Corporation, UPS) for 22 years. During this event, we examined the nation’s ongoing small business credit crisis under a microscope. We heard from and spoke to legislative leaders (e.g., Senator Mary Landrieu), executive branch leaders (e.g., SBA Administrator Karen Mills), business industry leaders (e.g., Bruce Joston, Executive VP of the U.S. Chamber of Commerce), leading bankers, small business owners, journalists and others. Lots of high-powered movers and shakers in a room all day long focused on this severe and lingering credit crisis.
For me, the #1 takeaway from this Summit was the message delivered in a lengthy, detailed report commissioned for the IFA that was published by analyst firm, Frandata. Frandata’s President, Darrell Johnson told attendees that the multi-billion dollar under-supply of loans for qualified borrowers seeking to fund the purchase of existing and new, franchised and non-franchised, businesses is projected to continue for the next 3 to 5 years….and probably longer. Sobering and grim news – for everyone.
So, business brokers, why am I bothering you with a report about this inside-the-Washington-DC-beltway event? The answer is simple: the quote above by Charles Darwin applies equally to business brokers. Most importantly, this means that if, 2.5 years into our nation’s small business Credit Crunch, you haven’t already adapted to this massive change in the landscape of financing business deals, you might be headed toward extinction. Attempting to ignore this stubborn reality is not a sound strategy for survival.
My dictionary defines “adapt” as “adjusting oneself nimbly and effectively to new and different environmental conditions.” And while there may be several ways to adapt to the severe shortage of bank loans for qualified purchasers of existing small franchised and non-franchised businesses, I am qualified to help educate you about one particularly adaptive strategy.
What if you could get your deals done faster, easier, frequently at no extra cost to sellers and buyers via avoiding bank loans altogether? I’m a born and (legally trained) skeptic – so if this, at first, sounds too good to be true, I invite you to consider the following.
It is a well-established fact that business sellers who offer seller financing usually attract more buyers who seek the benefit (some might say luxury) of avoiding the need for a bank loan. And while there may be some debate as to precisely how much more buyers are willing to pay for businesses that offer seller financing – some estimate this pricing premium to be around 20% — there can be no debate that most buyers are willing to pay higher prices for seller-financed businesses.
And yet, for good reason, business sellers are often reluctant to carry back seller financing. After all, there are two downsides presented by seller financing. First, is the frustration of having to wait several years for monthly installment payments to dribble in; sellers need all of their cash at, or shortly after, their deal’s closing. Second, is the fear that their buyer might default on their note payment obligations – a truly nightmare scenario.
Luckily, there is an under-appreciated fact that brokers can bring front and center, as their secret weapon for adapting to the current (non) lending environment. And that under-appreciated fact is as follows:
- Seller-financed carry-back notes are sellable for lump sum cash.
This means that a business seller can enjoy all of the upside benefits presented by seller financing (attracting more buyers, willing to pay higher prices), while trading away the downside frustration and risk involved in holding onto seller financed notes for several years following the sale of their business.
As you may know, when a promissory note is sold into the so-called secondary market for lump sum cash, the note purchaser pays a percentage of the face value (remaining principal balance) of that note. This is true regardless of: (i) whether the note is performing (timely, fully paid) or non-performing; and (ii) whether the note is secured by real estate, equipment or cash flow produced an established business.
The note’s discount percentage reflects both (a) the time value of money (i.e., because of inflation, a dollar collected several years in the future (at the end of the note’s term) is worth less than a dollar collected today; and (b) the risk that the note buyer might not collect some or all of the installment payments that they purchased with their cash. So what is the cost to seller of the seller-financed note? Let’s look at the following example, using simple round numbers.
Let’s say a business is sold for $100,000 with a 20% ($20,000) cash down payment, the remaining $80,000 principal balance seller financed. And let’s say the seller collects the first 3 months of the note’s installment payments totaling $10,000 (so-called “seasoning”). Next, let us assume that the note buyer offers to purchase the remaining $70,000 principal balance, discounted by 24% — i.e., for $53,200. In this case, the buyer will have received $20,000 + $10,000 + $53,200 for a total of $83,200 – i.e., 83.2% of their $100,000 sales price.
But what about the $16,800 (24%) “cost” of selling that seller-financed note for lump sum cash? If seller financed enabled to seller to receive a sales price that was at least $16,800 greater than if they did not offer seller financing – which may often be the case these days – then there really is no net cost in selling this note for cash, compared to if the buyer were to have paid all cash at closing assisted by a bank loan.
Plus, a cost savings can frequently be factored in for avoiding the delays and frustrations involved in getting a deal almost done – perhaps multiple times – only to see it to fall apart due to problems with the buyer’s bank loan. Without a bank loan, seller financing is often the only way to get a deal done.
So even if seller financed notes can be sold for lump sum cash, how does this help business brokers close their transactions more effectively? The answer to that question arises from this important fact:
- It may be possible for a note buyer to quote a cash-out price quote for a not-yet-created seller-financed note upfront; i.e., before the seller has even offered seller financing to their prospective buyer.
If a broker helps their seller client arrange for the cash-out sale of their not-yet-created seller-financed note before that seller has offered or committed to carry back seller financing, that broker has helped make seller financing more feasible and attractive for the seller. In other words, if the seller knows upfront that they won’t have to wait for their installment note payments for several years – while worrying that those same payments might not be made – they would be far more willing to offer seller financing in the first place. And this increased willingness to offer seller financing helps brokers get more deals done, in ways that work for sellers and buyers during this ongoing small business credit crisis.
Of course, business brokers do not want to raise the possibility of introducing “complications” that could reduce the chances of getting a deal done. And brokers might worry that the note buyer’s due diligence process might introduce such factors. But remember that the documents and information required by reputable note buyers – things like P&L’s and tax returns of the business being sold – are the very same things that sellers must prepare for the buyer’s due diligence efforts.
Similarly, a business broker might be concerned that if a note buyer did not wish to purchase a not-yet-created seller-financed note after examining the business’ financial performance results, this lack of interest might influence to a prospective buyer of the business to become less interested in the deal. Because a reputable buyer of not-yet-created seller-financed business notes will typically communicate their lack of interest in buying that note prior to the seller even offer seller financing to a prospective buyer of their business, the chances of this scaring away any prospective buyers in this way is minimal.
But the broker might also wish to consider the more common reverse scenario. If a buyer were to learn, just prior to their purchase of a business, that a third party sought to purchase the seller-financed note that would be secured by that business, this will often provide an external validation of the business that helps to cement the deal. In other words, if the business looks objectively good to the note buyer – who is placing an unemotional bet that the purchased installment payments can and will be made – then the buyer’s confidence in their purchase decision can be bolstered.
So business brokers, your ability to adapt to change means that you must go over, under, around or through the huge bolder blocking the road – i.e., the severe lack of bank loans for business buyers. Adaptive and agile business brokers are open to testing out new tools for digging around or blasting through that enormous bolder in the road. They don’t waste time wishing that the bolder wasn’t there.
There may be other techniques to help get their deals done when bank loans are not easily available (i.e., for the foreseeable future). But brokers: your ability to, upfront, help arrange for the cash-out of a seller-financed note shortly following the sale of your client’s business is a power tool that will help you survive and thrive in this challenging landscape, where people still have a burning desire to get their deal done in order to pursue new and exciting opportunities in business and in life.
Rich Kolman is the founder, president and principal owner of Franchise Note Buyers, LLC, a company that helps business brokers arrange for the sale of seller-financed carry-back notes for lump sum cash. From 1988 through 2010, Mr. Kolman was in-house transactional attorney for leading franchisor companies such as McDonald’s Corporation and UPS (The UPS Store). He can be reached at (ph) 855-362-2274 or rich@franchisenotebuyers.com.
Here’s How It All Works
Their process differs somewhat, depending upon whether or not a seller-financed note has already been created. On a previously created note, you can generate referral fee opportunities by simply opening your filing cabinet and finding the name and phone number of the seller who carried back seller financing.
If you put the seller in touch with Franchise Note Buyers and if their team buys that note, you’ll receive your referral fee. There is nothing more you need to do in order to earn your fee. And there is always the possibility that the note seller might use their cash-out monies as a down payment toward another business that you are trying to help sell….which might be sold using seller financing!
For their Transfer Facilitator program (where you also earn referral fees), their process works like this:
- They speak with the seller and/or their broker via phone, and learn the contemplated deal terms. Things such as the anticipated (1) purchase price of the business; (2) amount of cash down payment; (3) terms of the not-yet-created seller-financed note (e.g., principal amount, number of years, interest rate); (4) collateral that would secure the note; and (5) annual revenues of the business being sold.
- Usually within one or two business days, the seller will receive a conditional price quote as to how much cash they would receive for their seller-financed note. Conditions include (1) the business terms remaining the same as were described to Franchise Note Buyers; (2) successful completion of the due diligence process (see below); and (3) “seasoning” – the number of monthly payments the buyer (note payor) must make following the sale of the business.
- You then help your seller provide the necessary documentation and verification of information needed by the underwriter. During this time, the seller and broker, along with the seller’s attorney, may wish to begin offering seller financing to a prospective buyer, as part of the deal. Of course, merely receiving a cash-out offer from Franchise Note Buyers doesn’t obligate the seller to offer seller financing to their buyer.
- In terms of timing, the type of documents which the seller already has (e.g., P&L, tax returns) are provided upfront, while the not-yet-created documents (e.g., promissory note, security agreement, asset purchase agreement) are provided to Franchise Note Buyers as they become created.
- Promptly after all of the conditions are satisfied (including “seasoning” – which is usually as little as 3 months), the seller-financed note is sold by the business seller to the Franchise Note Buyers team. And your referral fee payment is processed promptly thereafter.
I also had the pleasure to meet Rich’s business partner, Eric Simon, at the May 2011 IBBA Annual Convention, where Franchise Note Buyers was a trade show exhibitor. Eric and Rich worked several years together at UPS, where Rich served as UPS’s franchise attorney and Eric served as a UPS franchise development manager for the international and domestic The UPS Store and Mail Boxes Etc. network. And as the area developer and franchise owner of a restaurant himself, Eric has a first-hand understanding of how to get deals done.
To start the ball rolling for exploring a possible cash-out for your pending deal or for your already-completed seller-financed transaction, I suggest you contact Eric directly via (ph) 855-362-2274 or eric@franchisenotebuyers.com.
